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Amazon advances into the UK grocery scene with Morrison deal

February 29, 2016 10:42 AM

(Bloomberg)—Amazon.com Inc. stepped up its incursion into the U.K. grocery market, signing a deal to sell hundreds of products supplied by Wm Morrison Supermarkets Plc.

The agreement is the first of its kind in the U.K. by the world’s largest e-commerce company and adds pressure on an already crowded industry. Morrison also said Monday that it’s in talks to rejig its three-year-old partnership with Ocado Group Plc, No. 19 in the Internet Retailer 2015 Europe 500 Guide. Ocado’s shares fell on concerns of increased competition from Amazon, No. 1 in the Internet Retailer 2015 Top 500 Guide.

By partnering with the smallest of the main U.K. grocers, Amazon is stepping up its advance on a market already grappling with higher minimum wages and a price war spurred by the expansion of discounters. Such headwinds may lead retailers to cut as many as 900,000 jobs over the next decade, the British Retail Consortium said Monday in a report. Shares of Tesco Plc and J Sainsbury Plc declined in London, while Morrison rose. Tesco is No. 3 in the Europe 500; Sainsbury’s is No. 16.

“The advance of Amazon as a participant in U.K. grocery is a potential challenge to the whole trade in time,” Clive Black, an analyst at Shore Capital, said in a note. “For Ocado, the Amazon contract enhances a pure-play challenge.”

Years behind

Under the agreement with Morrison, which was years behind its U.K. peers in offering online shopping, Amazon will offer a selection of the grocer’s goods through its Prime Now and Pantry services. Amazon customers will have access to a range of ambient, fresh and frozen products, according to the statement.

The deal brings together Amazon’s distribution clout and Morrison’s food production capability, a rarity among U.K. supermarkets who typically don’t make the food they sell. The U.S. company sells 150 million items from its U.K. website.

By teaming with Amazon, Morrison will be able to capitalize on past investment in manufacturing facilities, according to Tristan Chapple, head of research at Phoenix Asset Management, which owns about 1% of the stock. An increase in production volume “should impact profitability in their production businesses positively,” he said by email.

The deal, which analysts at Jefferies called “imaginative,” comes after Morrison arrested four years of declining same-store sales over the holiday period. CEO David Potts is reducing prices and adding workers across its 650 stores to win back shoppers.

Separately, Morrison and Ocado have reached agreement in principle for the supermarket company to share some of the capacity at an Ocado warehouse being built in Erith, southeast London. The facility is due to open at the end of 2017. Ocado will also provide Morrison with software to fulfill online orders from its stores. The companies first teamed up in 2013, allowing Morrison to break into e-commerce for the first time.